Assume the annual effective interest rate is i = 2%. An individual wants to invest a capital of £100,000 and is contemplating two projects:Project A. She buys a property for exactly £100,000 at time t = 0 that will generate income from rent. a)If rent is paid monthly in advance and each payment is £700, how long will it take before the present value of rental payments exceeds the initial cost of purchasing the property? b)To be more realistic assume that rent increases every three years at a rate of 1% effective per annum compound, and taxes are paid at 20% on rental income. Moreover, maintenance work for the property will cost £1,500 to be paid at the end of every 5 years (and these are not subject to tax relief). If rental payments stop after 15 years, what is the net present value (at time t = 0) of all cash flows for 15 years? (Include maintenance costs paid at t = 15 years.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Assume the annual effective interest rate is i = 2%. An individual wants to invest a capital of £100,000 and is contemplating two projects:Project A. She buys a property for exactly £100,000 at time t = 0 that will generate income from rent.

a)If rent is paid monthly in advance and each payment is £700, how long will it take before the present value of rental payments exceeds the initial cost of purchasing the property?

b)To be more realistic assume that rent increases every three years at a rate of 1% effective per annum compound, and taxes are paid at 20% on rental income. Moreover, maintenance work for the property will cost £1,500 to be paid at the end of every 5 years (and these are not subject to tax relief). If rental payments stop after 15 years, what is the net present value (at time t = 0) of all cash flows for 15 years? (Include maintenance costs paid at t = 15 years.)

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